Accounting change, priority-industry profits and rest-house disallowance shaped the tax treatment of business deductions.

A bona fide change in accounting method under section 145 can permit deduction of both bonus actually paid on cash basis and the provision for bonus in the transition year. Receipts such as technical collaboration fees, interest and rent were treated as part of the profits attributable to the priority industry for section 80-I deduction, following the assessee's earlier decision. Expenditure on maintenance of employee rest houses was held not allowable because the distinction between a rest house and a guest house was immaterial, and no prescribed register was maintained; the disallowance followed under sections 37(3) and 37(4).

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Issues: (i) Whether the assessee was entitled, in the year of change of accounting method, to deduction of both the bonus actually paid on cash basis and the provision for bonus; (ii) Whether technical collaboration fees, interest, and rent formed part of the profits attributable to the priority industry for deduction under section 80-1; (iii) Whether expenditure on maintenance of rest houses for employees was disallowable under sections 37(3) and 37(4).

Issue (i): Whether the assessee was entitled, in the year of change of accounting method, to deduction of both the bonus actually paid on cash basis and the provision for bonus.

Analysis: Section 145 requires income from business to be computed in accordance with the method of accounting regularly employed. A bona fide and regularly followed change in method is permissible. In the year of transition, corresponding consequences of both the earlier and the changed method may arise, and the mere fact that the assessee had earlier followed cash basis for bonus did not bar allowance of the provision when the change was bona fide and consistently adopted thereafter.

Conclusion: The assessee was entitled to deduction of both the amount actually paid and the provision for bonus. This issue is decided in favour of the assessee.

Issue (ii): Whether technical collaboration fees, interest, and rent formed part of the profits attributable to the priority industry for deduction under section 80-1.

Analysis: The question was treated as covered by the earlier decision in the assessee's own case. On that footing, the receipts in question were held to be part of the profits attributable to the priority industry for purposes of deduction.

Conclusion: The three items of receipt were includible in the profits attributable to the priority industry. This issue is decided in favour of the assessee.

Issue (iii): Whether expenditure on maintenance of rest houses for employees was disallowable under sections 37(3) and 37(4).

Analysis: The distinction between a rest house and a guest house was held to be unsubstantial. For the relevant period, section 37(3) permitted allowance only if the prescribed register was maintained, and thereafter section 37(4) barred deduction of guest house expenditure altogether. As no register was maintained, the claim failed.

Conclusion: The expenditure on maintenance of the rest houses was not allowable. This issue is decided in favour of the Revenue.

Final Conclusion: The reference was answered by upholding the assessee's claims on bonus and priority-industry profits, while sustaining the disallowance of rest-house expenditure.

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